Warren Buffett’s namesake gauge is sounding the alarm on stocks, John Hussman says.
The Buffett Indicator is “above every extreme prior to late-2020,” the markets guru posted on X.
The metric compares the total value of the US stock market to the size of the national economy.
Warren Buffett’s go-to market gauge is ringing alarm bells for one of Wall Street’s biggest bears.
The legendary stock picker and Berkshire Hathaway CEO once hailed the so-called Buffett Indicator, which takes the total market capitalization of all actively traded US stocks and divides it by the latest estimate of quarterly gross domestic product (GDP), as “probably the best single measure of where valuations stand at any given moment.”
John Hussman, a veteran investor and financial historian, warned the yardstick has surged to worrying levels in a X post this week.
“Say what you will about Buffett’s old favorite MCap/GDP – like most measures that are highly correlated with actual subsequent market returns, it’s still above every extreme prior to late-2020,” he said.
Hussman said he prefers dividing the stock market’s total value by gross value added, another measure of economic output, but that metric was “just as elevated.” Both measures aim to compare the total value of the US stock market to the size of the national economy.
Buffett wrote in a Fortune article in 2001 that when the indicator soared during the dot-com bubble, it was a “very strong warning signal” of an impending crash. He suggested that stocks would be cheap at a 70% or 80% reading, and offer good value at a 100%, but it would be “playing with fire” to buy when the gauge was around 200%.
Hussman’s chart, pulled from the St. Louis Fed’s FRED database, puts the Buffett Indicator at over 225%, well below its pandemic peak but higher than at any point prior to 2020. Taking the FT Wilshire 5000’s market cap of about $43 trillion, and dividing it by the US government’s advance estimate for third-quarter GDP of $27.62 trillion, gives a still lofty 157% reading.
Buffett’s namesake gauge isn’t flawless…